MASTER'S THESIS Stock Trend Prediction Using News Articles

165 Pages·2007·1.89 MB·English

by  Pegah Falinouss

2007:071
M A S T E R ' S T H E S I S
Stock Trend Prediction Using
News Articles
A Text Mining Approach
Pegah Falinouss
Luleå University of Technology
Master Thesis, Continuation Courses
Marketing and e-commerce
Department of Business Administration and Social Sciences
Division of Industrial marketing and e-commerce
2007:071 - ISSN: 1653-0187 - ISRN: LTU-PB-EX--07/071--SE
Stock Trend Prediction Using News Articles
A Text Mining Approach

Supervisors:
Dr. Mohammad Sepehri
Dr. Moez Limayem

Prepared by: Pegah Falinouss

Tarbiat Modares University
Faculty of Engineering
Department of Industrial Engineering

Luleå University of Technology
Department of Business Administration and Social Sciences
Division of Industrial Marketing and E-Commerce

MSc PROGRAM IN MARKETING AND ELECTRONIC COMMERCE

Joint 2007
Abstract
Stock market prediction with data mining techniques is one of the most important
issues to be investigated. Mining textual documents and time series concurrently, such as
predicting the movements of stock prices based on the contents of the news articles, is an
emerging topic in data mining and text mining community. Previous researches have
shown that there is a strong relationship between the time when the news stories are
released and the time when the stock prices fluctuate.
In this thesis, we present a model that predicts the changes of stock trend by
analyzing the influence of non-quantifiable information namely the news articles which
are rich in information and superior to numeric data. In particular, we investigate the
immediate impact of news articles on the time series based on the Efficient Markets
Hypothesis. This is a binary classification problem which uses several data mining and
text mining techniques.
For making such a prediction model, we use the intraday prices and the time-
stamped news articles related to Iran-Khodro Company for the consecutive years of 1383
and 1384. A new statistical based piecewise segmentation algorithm is proposed to
identify trends on the time series. The news articles are preprocessed and are labeled
either as rise or drop by being aligned back to the segmented trends. A document
selection heuristics that is based on the chi-square estimation is used for selecting the
positive training documents. The selected news articles are represented using the vector
space modeling and tfidf term weighting scheme. Finally, the relationship between the
contents of the news stories and trends on the stock prices are learned through support
vector machine.
Different experiments are conducted to evaluate various aspects of the proposed
model and encouraging results are obtained in all of the experiments. The accuracy of the
prediction model is equal to 83% and in comparison with news random labeling with
51% of accuracy; the model has increased the accuracy by 30%. The prediction model
predicts 1.6 times better and more correctly than the news random labeling.
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Acknowledgment
There are many individuals who contributed to the production of this thesis
through their moral and technical support, advice, or participation.
I am indebted to my supervisors Dr. Mehdi Sepehri and Dr. Moez Limayem for
their patience, careful supervision, and encouragement throughout the completion of my
thesis project. It has been both a privilege and a pleasure to have experienced the
opportunity to be taught by two leading international scholars. I sincerely thank you both
for being the sort of supervisors every student needs - astute, supportive, enthusiastic, and
inspiring. The ideal role models for a beginning academic and the best possible leading
academics to supervise an ambitious enhancement study.
I would like to express my appreciation to Dr. Babak Teimourpour, the PhD
student in Industrial Engineering in Tarbiat Modares University. He has been of great
help, support, and encouragement in accomplishing the research process.
I would also like to express my gratitude to Tehran Stock Exchange Services
Company for their cooperation in providing the data from their databases.
Finally, I would like to thank my family and friends and especially my husband
for his understanding, encouragement, and support over the completion and fulfillment of
my research project. I would like to dedicate my thesis to my parents and my husband.

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Table of Content
Abstract .......................................................................................................... 1
Acknowledgment ........................................................................................... 2
List of Table ................................................................................................... 6
List of Figure ................................................................................................. 7

Chapter 1: Introduction and Preface .......................................................... 8

1.1 Considerations and Background ............................................................................... 8
1.2 The Importance of Study ........................................................................................ 11
1.3 Problem Statement .................................................................................................. 12
1.4 Research Objective ................................................................................................. 13
1.5 Tehran Stock Exchange (TSE) ................................................................................ 14
1.6 Research Orientation ............................................................................................... 14

Chapter 2: Literature Review .................................................................... 15

2.1 Knowledge Discovery in Databases (KDD) ........................................................... 15
2.1.1 Knowledge Discovery in Text (KDT) ............................................................. 17
2.1.2 Data Mining Vs. Text Mining .......................................................................... 18
2.1.3 The Burgeoning Importance of Text Mining ................................................... 18
2.1.4 Main Text Mining Operations ......................................................................... 20
2.2 Stock Market Movement ......................................................................................... 20
2.2.1 Theories of Stock Market Prediction ............................................................... 20
2.2.1.1 Efficient Market Hypothesis (EMH) ...................................................... 21
2.2.1.2 Random Walk Theory ............................................................................. 21
2.2.2 Approaches to Stock Market Prediction .......................................................... 22
2.2.2.1 Technicians Trading Approach ............................................................... 22
2.2.2.2 Fundamentalist Trading Approach ......................................................... 23
2.2.3 Influence of News Articles on Stock Market ................................................... 24
2.3 The Scope of Literature Review ............................................................................. 25
2.3.1 Text Mining Contribution in Stock Trend Prediction ...................................... 26
2.3.2 Review of Major Preliminaries ........................................................................ 27
2.4 Chapter Summary ................................................................................................... 40

Chapter 3: Time Series Preprocessing ...................................................... 42

3.1 Time Series Data Mining ........................................................................................ 42
3.1.1 On Need of Time Series Data Mining ............................................................. 43
3.1.2 Major Tasks in Time Series Data Mining ........................................................ 44
3.2 Time Series Representation .................................................................................... 44
3.2.1 Piecewise Linear Representation (PLR) .......................................................... 45
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3.2.2 PLR Applications in Data Mining Context ...................................................... 46
3.2.3 Piecewise Linear Segmentation algorithms ..................................................... 47
3.2.4 Linear Interpolation vs. Linear Regression ...................................................... 49
3.2.5 Stopping Criterion and the Choice of Error Norm ........................................... 49
3.2.6 “Split and Merge” Algorithm ........................................................................... 51
3.3 Summary ................................................................................................................. 52

Chapter 4: Literature on Text Categorization Task ............................... 53

4.1 Synopsis of Text Categorization Problem .............................................................. 53
4.1.1 Importance of Automated Text Categorization ............................................... 54
4.1.2 Text Categorization Applications .................................................................... 55
4.1.3 Text Categorization General Process ............................................................... 56
4.2 Text Preprocessing .................................................................................................. 57
4.3 Dimension & Feature Reduction Techniques ......................................................... 58
4.3.1 Feature Selection vs. Feature Extraction ......................................................... 59
4.3.2 Importance of Feature Selection in Text Categorization ................................. 60
4.3.3 Feature Selection Approaches & Terminologies ............................................. 61
4.3.3.1 Supervised vs. Unsupervised Feature Selection ..................................... 61
4.3.3.2 Filter Approach vs. Wrapper Approach .................................................. 62
4.3.3.3 Local vs. Global Feature Selection ......................................................... 64
4.3.4 Feature Selection Metrics in Supervised Filter Approach ............................... 65
4.4 Document Representation ....................................................................................... 72
4.4.1 Vector Space Model ......................................................................................... 73
4.4.2 Term Weighting Methods in Vector Space Modeling ..................................... 74
4.5 Classifier Learning .................................................................................................. 76
4.5.1 Comparison of Categorization Methods .......................................................... 77
4.5.2. Support Vector Machines (SVMs) .................................................................. 80
4.5.3 Measures of Categorization Effectiveness ....................................................... 83
4.6 Summary ................................................................................................................. 87

Chapter 5: Research Methodology ............................................................ 88

5.1 Research Approach and Design Strategy ................................................................ 88
5.2 The Overall Research Process ................................................................................ 90
5.2.1 Data Collection ................................................................................................ 92
5.2.2 Document Preprocessing ................................................................................. 95
5.2.3 Time Series Preprocessing ............................................................................... 95
5.2.4 Trend and News Alignment ............................................................................. 97
5.2.5 Feature and Useful Document Selection .......................................................... 99
5.2.6 Document Representation .............................................................................. 101
5.2.7 Dimension Reduction ..................................................................................... 102
5.2.8 Classifier Learning ......................................................................................... 104
5.2.9 System Evaluation ......................................................................................... 104

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Chapter 6: Results and Analysis ............................................................. 105

6.1 Time Series Segmentation Results and Evaluation .............................................. 105
6.2 News and Trend Alignment Results ..................................................................... 108
6.3 Document Selection & Representation Results .................................................... 108
6.4 Random Projection Result .................................................................................... 110
6.5 Classifier Learning and SVM Results................................................................... 111
6.5 Data Analysis and Model Evaluation ................................................................... 113

Chapter 7: Conclusion and Future Directions ....................................... 119

7.1 An Overview of Study .......................................................................................... 119
7.2 The Concluding Remark ....................................................................................... 121
7.3 Limitations and Problems ..................................................................................... 121
7.4 Implications for Financial Investors ..................................................................... 123
7.5 Recommendation for Future Directions ................................................................ 123

Reference ................................................................................................... 125
Appendix 1 ................................................................................................. 148
Appendix 2 ................................................................................................. 149
Appendix 3 ................................................................................................. 155

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List of Table
Table 2.1: Articles Related to the Prediction of Stock Market Using News Articles ....... 26
Table 4.1: The Core Metrics in Text Feature Selection and Their Mathematical Form ... 68
Table 4.2: Criteria and Performance of Feature Selection Methods in kNN and LLSF ... 69
Table 4.3: The Contingency Table for Category c ........................................................... 84
Table 4.4: The Global Contingency Table ........................................................................ 84
Table 4.5: The Most Popular Effectiveness Measures in Text Classification .................. 85
Table 5.1: Examples of News Links and Their Release Time .......................................... 94
Table 5.2: A 2x2 Contingency Table; Feature fj Distribution in Document Collection . 100
Table 6.1: Selected Features for Rise and Drop Segments Using Chi-Square Metric ... 100
Table 6.2: An Illustration of tfidf Document Representation ......................................... 110
Table 6.3: Result of Prediction Model ............................................................................ 112
Table 6.4: Confusion Matrix for News Random Labeling ............................................. 114

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List of Figure
Figure 2.1: An Overview of Steps in KDD Process ......................................................... 16
Figure 2.2: KDT Process................................................................................................... 17
Figure 2.3: Unstructured vs. Structured Data ................................................................... 19
Figure 2.4: The Scope of Literature Review ..................................................................... 25
Figure 2.5: Architecture and Main Components of Wuthrich Prediction System ............ 28
Figure 2.6: Lavrenko System Design................................................................................ 30
Figure 2.7: Overview of the Gidofalvi System Architecture ............................................ 32
Figure 2.8: An Overview of Fung Prediction Process ...................................................... 34
Figure 2.9: Fixed Period vs. Efficient Market Hypothesis; Profit Comparisons .............. 35
Figure 2.10: Architecture of NewsCATS ....................................................................... 377
Figure 2.11: “Stock Broker P” System Design ............................................................... 388
Figure 2.12: Knowledge Map; Scholars of Stock Prediction Using News Articles ......... 41
Figure 3.1: Examples of a Time Series and its Piecewise Linear Representation ............ 46
Figure 3.2: Linear Interpolation vs. Linear Regression .................................................... 49
Figure 4.1: The Feature Filter Model ................................................................................ 63
Figure 4.2: The Wrapper Model ....................................................................................... 63
Figure 4.3: Top Three Feature Selection Methods for Reuters 21578 (Micro F1) ........... 70
Figure 4.4: Comparison of Text Classifiers ...................................................................... 78
Figure 4.5: The Optimum Separation Hyperplane (OSH) ................................................ 81
Figure 4.6: Precision-Recall Curve ................................................................................... 86
Figure 5.1: Research Approach and Design Strategy of the Study ................................... 89
Figure 5.2: The Overall Research Process ........................................................................ 90
Figure 5.3: The Prediction Model ..................................................................................... 91
Figure 5.4: News Alignment Formulation ........................................................................ 97
Figure 6.1: Iran-Khodro Original Time Series for Years 1383 and 1384 ....................... 106
Figure 6.2: Iran-Khodro Segmented Time Series for Years 1383 and 1384 .................. 106
Figure 6.3: Iran-Khodro Original Time Series; Small Sample Period ............................ 107
Figure 6.4: Iran-Khodro Segmented Time Series; Small Sample Period ....................... 107
Figure 6.5: SVM Parameter Tuning ................................................................................ 112
Figure 6.6: Precision-Recall Curve of Prediction Model vs. Random Precision-Recall 116
Figure 6.7: ROC Curve for Prediction Model vs. Random ROC Curve ........................ 117

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Chapter 1
Introduction and Preface

1. Introduction and Preface
The rapid progress in digital data acquisition has led to the fast-growing amount
of data stored in databases, data warehouses, or other kinds of data repositories. (Zhou,
2003) Although valuable information may be hiding behind the data, the overwhelming
data volume makes it difficult for human beings to extract them without powerful tools. In
order to relieve such a data rich but information poor dilemma, during the late 1980s, a
new discipline named data mining emerged, which devotes itself to extracting knowledge
from huge volumes of data, with the help of the ubiquitous modern computing devices,
namely, computer. (Markellos et al., 2003)
1.1 Considerations and Background
Financial time series forecasting has been addressed since the 1980s. The
objective is to beat financial markets and win much profit. Until now, financial
forecasting is still regarded as one of the most challenging applications of modern time
series forecasting. Financial time series have very complex behavior, resulting from a
huge number of factors which could be economic, political, or psychological. They are
inherently noisy, non-stationary, and deterministically chaotic. (Tay et al., 2003)
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